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Justice Department Settles Case With Major Nasdaq Dealers

July 17, 1996

WASHINGTON (AP) _ Two dozen Wall Street firms have agreed to settle a price fixing investigation on the Nasdaq Stock Market that requires them to install expensive monitoring systems to ensure brokers aren’t stifling competition or padding trading profits.

The Justice Department said Wednesday that two dozen Wall Street firms agreed to settle a price fixing investigation on the Nasdaq Stock Market, the nation’s second largest after the New York Stock Exchange.

Attorney General Janet Reno said Wednesday the Nasdaq dealers engaged in a widespread practice of quoting stock prices by rounding off prices to the nearest quarter of a dollar.

That resulted in ``many millions of dollars manipulated from the pockets of consumers,″ Reno said. ``Dealers increased their profits at the expense of investors.″

These trading practices amounted to price fixing, said Assistant Attorney Anne Bingaman, head of the department’s antitrust division.

She called the settlement ``a substantial savings to American investors who trade on Nasdaq.″

The brokerage houses, which include Merrill Lynch & Co. and Charles Schwab’s Mayer & Schweitzer unit, admitted no wrongdoing in the settlement filed in U.S. District Court in Manhattan, details of which the department released in Washington. A federal judge must grant final approval of the agreement.

The extensive civil investigation was to determine whether Nasdaq dealers had a broad agreement to keep the gap between buying and selling price quotes artificially wide _ and punish firms that sought to offer competitive prices. The investigation involved no criminal charges, which could have led to fines or other penalties.

The settlement will require brokerages to tape record about 3.5 percent of the telephone calls between brokers, which will result in 4,500 hours of tape a year. The Justice Department retains the right to listen to these conversations secretly, Bingaman said.

``This is a powerful deterrent,″ she said.

She described instances in which brokers would make harassing telephone calls to competing firms that were offering better deals and therefore eroding profit margins. The settlement forbids brokerages from harassing or intimidating other dealers that offer better prices for Nasdaq stocks.

An attorney for Mayer & Schweitzer, one of the biggest Nasdaq dealers, denied the firm did anything wrong.

``We strongly deny there is any market-wide conspiracy or collusion,″ said Catherine Ludden. ``We do not believe there is any quoting practice that disadvantaged the public.″

Merrill Lynch spokesman Timothy Gilles said the firm denies it broke antitrust laws but said it settled to avoid costly litigation. Terms of the Justice agreement ``are consistent with the best interest of our clients,″ he said.

Joseph R. Hardiman, president of Nasdaq’s parent company, the National Association of Securities Dealers Inc., said that if the federal probe uncovered instances of illegal activity on the market, ``they will be actively pursued by NASD Regulation.″ Hardiman referred to the NASD’s new policing arm.

Nasdaq plans to closely oversee the firms’ implementation of their new monitoring systems, he added.

The Nasdaq dealers have said the wider price gap compensates dealers for the higher risk in handling trades on Nasdaq as opposed to traditional auction exchange, such as the New York Stock Exchange, the brokerages have said.

Nasdaq is an electronic market where stocks are traded via telephone calls and computer keystrokes.

The probe began in 1994 following academic studies that noted the gap between the buying and selling prices of Nasdaq-listed stocks was much wider than comparable stocks listed on the New York Stock Exchange.

The Justice case is the first of two major federal actions to occur this summer concerning Nasdaq. The Securities and Exchange Commission soon is expected to announce the results of its investigation of Nasdaq’s parent, the National Association of Securities Dealers Inc.

SEC spokeswoman Jennifer Scardino said the agency was pleased that Justice and the firms reached an agreement that is ``a step towards assuring that our markets are as fair and as efficient as investors expect them to be.″

Still unresolved for the firms is a major private lawsuit pending in U.S. District Court. Philadelphia attorney Arthur Kaplan said finding filed with the Justice agreement ``helps our case a great deal.″

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